Economic Crime and Corporate Transparency Bill

Supplementary written evidence submitted by Professor John Heathershaw, University of Exeter, & Thomas Mayne, University of Oxford (ECCTB25)

Call for written evidence: Economic Crime and Corporate Transparency Bill

Tackling the UK’s Kleptocracy Problem: plausibility, responsibility, enforcement, and incentives

1. This evidence is being provided in addition to oral evidence given to the committee on October 25, 2022. Two papers co-authored by Heathershaw/Mayne (Criminality Notwithstanding [Global Integrity, 2022] and The UK’s Kleptocracy Problem [Chatham House, 2021]) [1] were provided to the committee in hard copy.

2. Mayne and Heathershaw previously submitted written evidence in March 2022 to the Economic Crime Committee along with several other academics and authors.

3. The UK’s AML system is not it for purpose and may embolden kleptocrats. AML both nationally and internationally (for example, recommendations proposed by the FATF) has a very poor record, creating inconvenience for low-risk businesses and being easily circumvented by high-risk individuals and companies. It is only generally effective against exiles, not against incumbent businessmen and political elites, that is oligarchs and kleptocrats.

4. An example of this is in real estate: in our database of 88 properties in the London area owned by elites from kleptocratic states and worth almost £2 Billion, 73 out of 73 (100%) of those owned by incumbents have been retained while 13 out of 15 owned by exiles (87%) have been lost.

5. In the case of the only two Unexplained Wealth Orders (UWOs) issued to date against property owned by politically exposed people, it is noteworthy that the UWO that was upheld was against an exile (whose husband, whose funds were likely used to buy the property, is in jail overseas) and that one that was dismissed was issued against an incumbent (who could appeal to their prosecutor’s office to receive a bill of clean health regarding their assets). This was despite there being certain similarities in the cases.

6. In short, it is not that exiles are more corrupt, but that they are more vulnerable to successful legal action, as they lack the support of their home nation, which in many cases may be working against them by providing evidence for the overseas investigation.

7. Incumbent elites from kleptocratic states can rest easily knowing their assets are safe in the UK.

8. Kleptocracy and money laundering are two different things. Our laws and AML regime are not primarily configured to counter kleptocracy. Kleptocrats do launder money, but most of their funds will be ‘legal’ – meaning either illegal activity will be ignored or even ruled legal by the corrupted courts of a kleptocracy, or there will be a system of political patronage – which is corrupt but may not break any national laws. An example of this would be a government contract awarded to a crony or family member of the head of state, as in Kazakhstan, or to oligarchs, as in Russia.

9. One aspect of our AML legislation which is configured to kleptocracy is that in instances where the client is a politically exposed person (a PEP), the regulated professional must conduct enhanced due diligence. However, we know that PEPs will use proxies and more distant family members who are not on WorldCheck or similar databases to avoid this extra scrutiny. It is concerning that current regulations remove the need for relatives of PEPs to be subject to enhanced due diligence as soon as their relative ceases to be in office, unless other risks are apparent. As power is both formal and informal in kleptocratic states, and may be retained onve formal positions are relinquished, such a rule is inappropriate and should be replaced with a much longer sunset clause with respect to former PEPs or no such clause at all.

10. The regulations also state that you must perform enhanced due diligence if the client is from a high-risk country, which was proscribed by the EU's high-risk third country list, but with this proposed Bill, will be decided by the Treasury. However, countries have historically found themselves on this high-risk third country list (and the similar FATF ‘grey’ list) not due to risk of grand corruption – or even because they pose a real and substantial threat to the global financial system – but because they fail to match up to certain AML criteria.

11. Thus, while a country like Jamaica is on both the EU high-risk third country list and the FATF ‘grey’ list, some of the worst kleptocracies in the world are not. Neither Russia, where the system of political patronage surrounding the oligarchs and other allies of President Putin is all too apparent, nor Turkmenistan, an extremely repressive country where the president literally controls the account which receives the revenues from the country’s gas sales, are on the list.

12. Regulated professionals are advised in the money laundering regulations to conduct enhanced due diligence if certain risks are apparent, including if the client is from ‘countries identified by credible sources as having significant levels of corruption.’ But this requires regulated professionals to become experts in international corruption, and it is unclear what would constitute a ‘significant’ level of corruption.

13. It would be far simpler for the Treasury to state what countries do possess a level of corruption that requires enhanced due diligence, or provide a ‘safe list’ of countries where enhanced due diligence does not have to be performed if no other risks are apparent.

14. The risk-based system does not work with respect to kleptocrats across all sectors. Neither the Economic Crime (Transparency and Enforcement) Act 2022 nor what is proposed in the current bill is adequate to tackle the UK’s kleptocracy problem. For example, the Act from March made fixes to the UWO legislation, but not enough in our view to address the legislation’s failings.

15. With respect to UWOs, the two greatest problems which remain are that: 1) wealth is considered "lawfully obtained" if it is generated legally under the laws of the country from where the income arises, even if that country is a kleptocratic state where law used in the service of the political and business elite; 2) that respondents can point to public statements of wealth as legitimate and sufficient evidence in and of themselves without corroborating evidence. Expert witness testimony must be used in such cases to assess the fairness of the legal system and sources of wealth in the home country. (See Criminality Notwithstanding, p.6).

16. The system of Suspicious Activity Reporting has been identified as a weakness and is being reformed, but with the banking sector unlikely to stop flooding the system with 100,000s of low-value SARs it is difficult to see – without much better funding of the NCA – how the new system will stem the tide of corrupt money from overseas.

17. Work from Professor Jason Sharman and others [2] has shown how the AML system is risk insensitive – in other words, those transactions that should be viewed as high-risk are not being designated as such. Outside of banking, very few SARs are submitted in the private sector, despite, for example, real estate transactions posing some of the highest risks for money laundering. There is no incentive to submit information as very few regulated professionals face disciplinary actions or prosecution for failing to report suspicions of money laundering.

18. As highlighted by a recent report from Spotlight on Corruption, "while legal professional privilege has a crucial role to play in securing access to justice, its potential for abuse or misapplication may be exacerbating the low rates of Suspicious Activity Reports (SARs) filed by the legal sector. Just 0.52% of SARs filed in 2019/20 came from the legal sector". [3]

19. Findings from OPBAS indicate that a failure to adopt a risk-based approach extends to the system of oversight and disciplinary procedures issued by the professional body supervisors: in 2020/21, it found that just 15% of legal and accountancy supervisors overall were effective "in using predictable and proportionate supervisory action" and that just 19% of legal and accountancy supervisors "had implemented an effective risk-based approach" to supervision. [4]

20. Currently, some institutions (banks) over report while most other sectors under report cases and detail citing "legal privilege" or claiming ignorance. Without criminality liability for enablers who turn a blind eye to corrupt sources of wealth and unclear beneficial ownership the AML system is unlikely to improve.

21. In sum, we need a threat-based system with responsibility on, enforcement against, and incentives for the enablers. The proposed bill marks progress on transparency but what is needed is a move from a risk-based system (which is general) to a threat-based system which tackles kleptocrats as dangers to UK economics, politics and even security.

22. Plausibility: Evidence from a foreign court in a jurisdiction considered "high-risk" by UK law enforcement should not be accepted without scrutiny by expert witness testimony; such evidence may be disregarded or struck out by judges where the balance of probability suggests that the litigant would have retained privilege or unfair advantage within that system.

23. Responsibility: There should be criminal liability (‘vicarious liability’) for companies and professionals with vastly increased fines for those who fail to prevent (‘passive enablers’) and prison sentences for those who are complicit (‘active enablers’) at an institutional level.

24. Enforcement: Laws are useless if they are not enforced. We need to strengthen the capacity of the National Crime Agency and other enforcement bodies by increasing their budgets and increasing the fines they can levy and the damages they can win. If this does not happen, the transparency efforts will be for naught (‘zombie transparency’).

25. Incentives: Law firms are commercial actors and can be incentivized to recoup laundered money. This is an enormous and emerging industry where the UK is especially advantaged.

26. Future legislation should address issues specifically related to kleptocracy. This threat-based system mentioned above needs to address how we legislate properly against this risk of grand corruption and kleptocratic financial flows coming to the UK.

27. In response to the illegal Russian invasion of Ukraine, sanctions have proved to be an effective political tool against those oligarchs and cronies close to Putin. But they represent only a freezing of property, not a seizure, and so there is a danger that whenever the Russian aggression ends, the sanctions are lifted, and assets are returned to the oligarchs for use in a future war or political campaign.

28. We must examine ways – while of course respecting the rule of law and property rights – of looking how to seize assets where there is evidence a person’s involvement of serious grand corruption. This would have to be done through the civil recovery process. Legislation could be considered that would recognize that kleptocracy is an organized crime (thus addressing the point made above of the false ‘legality’ of kleptocratic funds) or recognizing through legislation that assets garnered via corrupt political patronage can be recoverable.

29. Without such measures, the UK’s AML system will continue to be taken for a ride by a kleptocratic system which extends from some of the world’s most corrupt countries to their enablers in Britain.

18 November 2022